Negotiating Debt Relief for Greece in the Shadow of the Brexirendum

I've been saying for some time now that Greece's Prime Minister Alexis Tsipras is, contrary to conventional wisdom, a shrewd negotiator and tactician (see my post on this blog last summer bit.ly/1HqHRyA). These traits were clearly on display this last week, when Europe's leaders met to broker a deal on which British Prime Minister David Cameron could base his case for staying in the EU when Brexit gets put to a vote in the UK this June. Tsipras threatened to veto the deal if Greece were not given assurance that it could remain in Schengen for the time being, despite concerns about the control of its border with Turkey during the ongoing refugee crisis. Not surprisingly, given the stakes,Tsipras won.

Now let's turn to Greece's other crisis. The European institutions are stalling on approving further disbursements to Greece, stretching out the current review of Greece's implementation of last summer's bailout memorandum. Debt relief, a key element in the deal, has also been postponed. In particular, with the complicity of the IMF, Greece has been pushed to make deep across the board cuts in public pensions. Some pensions in Greece are anomalously high, and the responsible minister, George Katrougalos, freely admits that restructuring the pension system and creating a modern, effective social welfare state in Greece is a necessity for economic recovery and good governance. But with sky-high unemployment and falling wages, for many, pensions have become a de facto safety net; whole families are living from the income of a single pensioner. In these circumstances, the kind of indiscriminate slashing that the institutions want would inflict extreme and unjustifiable human hardship. It is difficult to know what is behind the unreasonableness in dealing with Greece on this issue: is it just the usual Germanic pious cruelty, or is it a strategy to try to bring down the Tsipras government in the hope of being able to deal with a more pliable, conservative new regime? Recently, the IMF's point man on Greece, Poul Thomsen, publicly defended the hard line on pensions, on the basis that this is the only way that Greece can meet its budgetary targets that are necessary for restoring debt sustainability. bit.ly/1KepnZk. But Thomsen made a key admission, perhaps unwittingly: debt relief, he suggested, could have the same effect on sustainability as would slashing pensions. He thus essentially told the Greeks to their face that further hardship was being forced on them, not because of any deep economic logic, but just because the needed amount of debt relief was not forthcoming.

The current line in the mainstream financial press is that Tsipras has no real cards he can play to resist the demands of the institutions on pensions. I think that's wrong. If the institutions won't be reasonable and moderate their demands, he can always blow up the third programme and default on Greece's official debt to Europe; one way to do that would be to draw up a final offer on pensions and related reforms, and put it to the people in a new referendum that if Europe doesn't accept that offer, Greece should default. Now, you say, isn't that exactly the "nuclear" option that Tsipras backed off from last summer, for fear of utter economic and social catastrophe in Greece, despite then winning a mandate for it by referendum? True enough, but certain things have changed since. Back then, it became painfully clear very quickly that Greece's banking system would have collapsed had it been cut off from further support from Europe in the wake of default. Now the banks have been recapitalized; and the problem of marginal,failing banks addressed by restructuring and consolidation. Secondly, Greece has, shrewdly, built a new friendship with Israel; Netanyahu, ever the savvy politician, sees the value of having a country in the Mediterranean amenable to Israel's interests and point of view (and there are the mutual gains of cooperation on offshore gas as well). Israel may well have made some kind of promise to Greece to function as a lender of last resort if things get bad.

But, most importantly, there is the looming referendum on Brexit (I call it Brexirendum for convenience). By defaulting but keeping the Euro, and perhaps also threatening non-cooperation on refugees, Greece is quite capable of throwing the EU into crisis,conflict and even chaos, precisely at a time when the utmost solidarity is needed to help out the campaign against Brexit. Just recall how bad the atmosphere was last summer until Tsipras blinked. What are the chances of defeating Brexit if an even worse climate of crisis pervades Europe when Britons go to the polls on June 23? It is perhaps no accident that the first concrete indication that debt relief for Greece is indeed on its way, and will include cutting interest not just extending maturities, came within hours of the end of last week's EU Brexit summit (in the form of apparent leak to a Greek newspaper about the drafting of a debt relief document reut.rs/1Q7sgf0). Germany stands to lose significantly from Brexit; the UK is perhaps the most important EU country that shares its economic ideology, and some German politicians have even gone so far as to threaten that Germany would erect steep trade barriers to British products in the face of Brexit (as many have noted a rather idle threat given Germany's/the EU's WTO obligations). Some Germans may still get moralistic pleasure from inflicting suffering on the Greek people, but hardly enough to hand the pro-Brexit forces, on a silver platter,as it were, a new or renewed Eurocrisis of huge proportions on the eve of the Brexirendum. And we should not forget that Schengen, the survival of which may depend on Greece continuing to play ball on borders and refugees, is not just some nice idealistic symbol of European civic unity; reinstatement of border controls and delays at crucial crossings will ultimately affect trade-the supply chains and inventory management of European business And that's most true of some of the countries that have been hardest on Greece, like Germany. Offering Greece a fair, sustainable deal on debt is not just the right thing to do on principle, it is hugely in Europe's, and even Germany's, self -interest at this crucial juncture.

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Negotiating Debt Relief for Greece in the Shadow of the Brexirendum

I've been saying for some time now that Greece's Prime Minister Alexis Tsipras is, contrary to conventional wisdom, a shrewd negotiator and tactician (see my post on this blog last summer bit.ly/1HqHRyA). These traits were clearly on display this last week, when Europe's leaders met to broker a deal on which British Prime Minister David Cameron could base his case for staying in the EU when Brexit gets put to a vote in the UK this June. Tsipras threatened to veto the deal if Greece were not given assurance that it could remain in Schengen for the time being, despite concerns about the control of its border with Turkey during the ongoing refugee crisis. Not surprisingly, given the stakes,Tsipras won.

Now let's turn to Greece's other crisis. The European institutions are stalling on approving further disbursements to Greece, stretching out the current review of Greece's implementation of last summer's bailout memorandum. Debt relief, a key element in the deal, has also been postponed. In particular, with the complicity of the IMF, Greece has been pushed to make deep across the board cuts in public pensions. Some pensions in Greece are anomalously high, and the responsible minister, George Katrougalos, freely admits that restructuring the pension system and creating a modern, effective social welfare state in Greece is a necessity for economic recovery and good governance. But with sky-high unemployment and falling wages, for many, pensions have become a de facto safety net; whole families are living from the income of a single pensioner. In these circumstances, the kind of indiscriminate slashing that the institutions want would inflict extreme and unjustifiable human hardship. It is difficult to know what is behind the unreasonableness in dealing with Greece on this issue: is it just the usual Germanic pious cruelty, or is it a strategy to try to bring down the Tsipras government in the hope of being able to deal with a more pliable, conservative new regime? Recently, the IMF's point man on Greece, Poul Thomsen, publicly defended the hard line on pensions, on the basis that this is the only way that Greece can meet its budgetary targets that are necessary for restoring debt sustainability. bit.ly/1KepnZk. But Thomsen made a key admission, perhaps unwittingly: debt relief, he suggested, could have the same effect on sustainability as would slashing pensions. He thus essentially told the Greeks to their face that further hardship was being forced on them, not because of any deep economic logic, but just because the needed amount of debt relief was not forthcoming.

The current line in the mainstream financial press is that Tsipras has no real cards he can play to resist the demands of the institutions on pensions. I think that's wrong. If the institutions won't be reasonable and moderate their demands, he can always blow up the third programme and default on Greece's official debt to Europe; one way to do that would be to draw up a final offer on pensions and related reforms, and put it to the people in a new referendum that if Europe doesn't accept that offer, Greece should default. Now, you say, isn't that exactly the "nuclear" option that Tsipras backed off from last summer, for fear of utter economic and social catastrophe in Greece, despite then winning a mandate for it by referendum? True enough, but certain things have changed since. Back then, it became painfully clear very quickly that Greece's banking system would have collapsed had it been cut off from further support from Europe in the wake of default. Now the banks have been recapitalized; and the problem of marginal,failing banks addressed by restructuring and consolidation. Secondly, Greece has, shrewdly, built a new friendship with Israel; Netanyahu, ever the savvy politician, sees the value of having a country in the Mediterranean amenable to Israel's interests and point of view (and there are the mutual gains of cooperation on offshore gas as well). Israel may well have made some kind of promise to Greece to function as a lender of last resort if things get bad.

But, most importantly, there is the looming referendum on Brexit (I call it Brexirendum for convenience). By defaulting but keeping the Euro, and perhaps also threatening non-cooperation on refugees, Greece is quite capable of throwing the EU into crisis,conflict and even chaos, precisely at a time when the utmost solidarity is needed to help out the campaign against Brexit. Just recall how bad the atmosphere was last summer until Tsipras blinked. What are the chances of defeating Brexit if an even worse climate of crisis pervades Europe when Britons go to the polls on June 23? It is perhaps no accident that the first concrete indication that debt relief for Greece is indeed on its way, and will include cutting interest not just extending maturities, came within hours of the end of last week's EU Brexit summit (in the form of apparent leak to a Greek newspaper about the drafting of a debt relief document reut.rs/1Q7sgf0). Germany stands to lose significantly from Brexit; the UK is perhaps the most important EU country that shares its economic ideology, and some German politicians have even gone so far as to threaten that Germany would erect steep trade barriers to British products in the face of Brexit (as many have noted a rather idle threat given Germany's/the EU's WTO obligations). Some Germans may still get moralistic pleasure from inflicting suffering on the Greek people, but hardly enough to hand the pro-Brexit forces, on a silver platter,as it were, a new or renewed Eurocrisis of huge proportions on the eve of the Brexirendum. And we should not forget that Schengen, the survival of which may depend on Greece continuing to play ball on borders and refugees, is not just some nice idealistic symbol of European civic unity; reinstatement of border controls and delays at crucial crossings will ultimately affect trade-the supply chains and inventory management of European business And that's most true of some of the countries that have been hardest on Greece, like Germany. Offering Greece a fair, sustainable deal on debt is not just the right thing to do on principle, it is hugely in Europe's, and even Germany's, self -interest at this crucial juncture.